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Q&A: …best way to calculate cost of living pay increases?

Cost of Living Pay Increase

Question:

We’d like to start giving cost of living raises to employees on their anniversary dates. What’s the best way to calculate these pay increases?


Answer from Ophelia, SPHR, GPHR, SHRM-SCP:

When the information is available, employers typically use the consumer price index (CPI) to calculate cost of living increases. It measures the change in prices consumers pay for goods and services such as housing, food, and medical care. Most heavily populated cities have their own CPI.

Most cities often see a small increase each year, but it is important to note that the CPI can also remain the same or decrease. It’s not guaranteed that a cost of living increase will occur based on the CPI. You can find the CPI for your urban area by searching the Bureau of Labor Statistics website.

If you tie salary increases to the CPI, I recommend that your policy neither guarantee annual raises nor decrease compensation when the CPI decreases. If you choose to guarantee a raise each year, you could have a minimal percentage increase that applies in those years in which the CPI does not increase. However, I typically recommend basing pay increases on merit, market factors, and profitability of the company.

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Ophelia has held HR roles in the financial services, healthcare, IT, real estate, and telecommunications industries. She holds a Bachelor of Arts degree in Sociology and a Masters of Business Administration (MBA) degree with a concentration in Human Resources from Willamette University. A member of SHRM since 2008, Ophelia currently serves as the Director of College Relations for a regional Human Resources Management Association.

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